With Israel’s parliamentary elections scheduled for 27 October 2026, the incoming administration will inherit a demanding mix of political, security, fiscal and diplomatic challenges. Tamsin Hunt examines how these pressures could shape the country’s policy direction and commercial environment over the coming year.
Israel’s elections, scheduled for 27 October, are shaping up as a contest between incumbent Benjamin Netanyahu’s ruling coalition and an opposition bloc led by Gadi Eisenkot’s Yashar Party. It remains uncertain, however, whether either side has enough support to secure the 61 seats needed for a majority in the Knesset, with both coalitions highly fragmented along ideological and religious lines, prone to infighting, and neither willing to partner with Palestinian political parties (which currently hold a critical 10 seats in parliament).
While political wrangling of this nature is a common feature on Israel’s political landscape, these elections come at a pivotal time for the country, set against a backdrop of deepening public polarisation over several issues, including: alleged security failures ahead of the Hamas attack on 7 October 2023; the conscription of ultra-Orthodox Jewish men into the military; controversial judicial reforms; repeated allegations of corruption facing Prime Minister Netanyahu and other members of his Likud party; and rising violent crime, particularly among Arab communities. Most prominent, however, are Israel’s ongoing security challenges. Regardless of who takes the helm as Israel’s next prime minister, unresolved conflicts will continue to shape the next administration’s agenda and leave little scope for significant changes to the country’s regional security policy.
Security will dominate the incoming government’s agenda
Israel has spent three years at war on multiple fronts, fighting: Hamas in the Gaza Strip, Hezbollah in Lebanon, the Houthis in Yemen (to a lesser extent), and Iran. The Hamas attack on 7 October 2023 represented an existential threat to Israel’s sense of state and security, while militancy in Gaza, the West Bank, Lebanon, and Iraq present ongoing threats along Israel’s borders. Additionally, the Iranian regime remains broadly intact and capable of attacking Israel – despite the US and Israel’s military efforts in early 2026 – while its tactics in the region have developed into a multi-pronged strategy of entrenched maritime blockades in and around the Strait of Hormuz, grey-zone tactics (including cyberattacks), and proxy warfare through its allied militias, aimed at expanding regional instability and disrupting commerce. With the Middle East region as a whole likely to experience further volatility over the coming year – most recently affecting Saudi Arabia and Yemen, for example – the likelihood that the next Israeli administration may temper the country’s security policies over the coming months is low.
Regardless of who takes the helm as Israel’s next prime minister, unresolved conflicts will continue to shape the next administration’s agenda and leave little scope for significant changes to the country’s regional security policy.''
With Israel’s security calculations likely to remain broadly unchanged over the short-to-medium term, pressure on the country’s fiscal reserves and business environment is likely to rise. While Israel has weathered successive episodes of open conflict over the years without entering a financial crisis, wars on multiple fronts have narrowed Israel’s fiscal reserves and reduced its capacity to cope with future shocks, and the government’s next budget will face the strain of high defence spending and elevated levels of foreign debt.
Foreign policy amid geopolitical isolation
Compounding these fiscal challenges, the incoming government will inherit an increasingly difficult foreign-policy environment. Relations between Israel and the US have become strained in recent months, amid declining appetite amongst the US public for prolonged military operations in the Middle East. Following US midterm elections in November – likely to shift the legislative landscape in the Senate and House of Representatives – Israel may face new limitations and conditions on financial and military support compared to years prior. Additionally, some of Israel’s other allies have adopted stronger rhetoric against its more controversial actions, with the UK recently leading a bloc of countries – including Canada, France, Spain, Portugal, Denmark, Finland, Sweden and others – in sanctioning businesses connected to settlement activity in the West Bank. Meanwhile, closer to home, Gulf states and other countries in the Middle East remain divided in their stance towards Israel. Some, like the UAE, view Israel as a pragmatic security partner against future Iranian aggression, while others like Saudi Arabia and Turkey have retreated from earlier diplomatic cooperation in response to Israel’s actions in Gaza.
Implications for Israel’s commercial environment
As they stand at present, sanctions by the UK and other countries will have a limited impact on Israel’s commercial environment. While Israeli settlements in the West Bank have vastly expanded in recent years – and now encompass at least 35 industrial zones – goods from these areas still comprise only a small volume of Israel’s overall exports. In trade with the UK, for instance, goods from West Bank settlements amounted to USD 11 million in 2025, a fraction of the overall USD 1.6 billion worth of Israeli goods exported to the UK that same year. That said, the UK has threatened to widen their latest sanctions to include secondary businesses linked with West Bank development, including companies involved in construction, financing, and real estate. Should Netanyahu lose the upcoming election, the international community may well temper their positions over the short term, allowing the new administration time and space to improve bilateral relations, but uncertainty around the potential future scope of sanctions will create regulatory difficulties for foreign businesses operating in Israel.
Over the longer term, recurring confrontations with Iran and its allied armed groups pose the greatest risk to business continuity in the country. During the US-Iran war in early 2026, Iranian strikes caused physical damage to industrial zones, transport networks, and energy infrastructure, but the risks also extend beyond direct missile exchanges, to cyberattacks and sabotage capable of disrupting company systems, critical infrastructure, and supply chains. Despite Israel’s sophisticated air defences intercepting 90 percent of incoming missiles, Israel’s major cities and commercial centres will remain exposed to periodic property damage, civilian casualties, and regular disruptions to daily life.
